Thursday, March 12, 2009

Mart Laar has a certain image, a furrier kind of Kalevipoeg, lying in wait to rescue Estonian politics just when his country needs him most. When he comes out with a policy statement, people tend to pay attention. When he says that he's got a practical solution to counteract the others' impotent squabbles, it merits a closer look.

In today's Riigikogu session, he came out with a ten-point plan to fix the economy and, in particular, the unemployment situation in Estonia. The original text is here (search for Mart Laar to get the relevant paragraphs; I don't think there's an English version anywhere yet). Here's a short summary:

1) Stop stalling and pass the enterprise support bill immediately. This is a program for 5.7 million kroons' worth of credit guarantees (not actual money), to be given out to small, export-oriented businesses. There have been some complaints that it excludes large companies, but overall it seems like a Good Idea(tm). Laar also mentions some sort of "business internationalization project", which includes an idea to create an international financial center in Estonia. Maybe the MPs know what Laar is talking about with that one, I certainly don't.

2) Initiate a program of loan guarantees for heat insulation on apartment buildings. Supposedly this program was initially proposed by Marek Strandberg of the Green Party. It's the rough equivalent of the "weatherization" project in Barak Obama's stimulus bill. Heating costs have been a big cause of worry and discontent among the population this winter, especially in Tallinn (where the utility companies have a monopoly) and especially in Soviet tower blocks. At the same time, insulation is a big, expensive job, and many homeowner associations find it hard to convince low-income and elderly residents that it is worthwhile.

3) Increase investment by allowing banks to decrease capital reserves to 12% of liabilities, if the extra liquidity is disbursed inside the country. Elegant in the sense that it increases the amount of money in the system without printing new kroons, but imposing less regulation on banks is what sir Humphrey Appleby would have called a courageous policy. Then again, if our major banks go under, it'll be Sweden's problem, so that's OK. Laar also suggests working out a way to put 20% of pension fund holdings into the economy, instead of the 1% currently mandated. Which is a good idea, in that most pension funds are buggered anyway, and local entrepreneurs are not likely to be, on average, any worse of an investment than global securities - but Laar better have a plan of action somewhere to achieve this.

4) Ease the payroll pressure on companies. Do not increase unemployment insurance premiums. Lose, or at least delay, unemployment benefits for people leaving their jobs voluntarily. Set a cap on social tax, to attract highly-skilled labour back to Estonia. This is roughly in line with the general policy of attracting investment first. The lack of corporate tax means the state needs to tax payroll fairly heavily, and that's been a complaint from both employers and workers; around 40% of the total cost of hiring someone is tax.

6) Lose supertax on employee training. This is an odd point in Estonian tax law: since there's a flat income tax, all kinds of employee benefits are automatically treated as an attempt at a tax dodge, so it actually costs the employer more to pay for a company car or a gym membership than increasing the employee's salary by the same amount. Interestingly, employers still do it. But making training cheaper is definitely a good thing for labour efficiency.

7) Cover companies' retraining expenses if they commit to maintaining a workforce; extend the state-guaranteed student loan program to professional training. It was worded awkwardly (what the hell is a koolitusosak?), but I think I'm reading this right. The student loan program is a fixed, low interest; I pay 5% on my college loans, in kroons, which is a hell of a good rate for a short-term loan on a small amount. Student loans are also relatively simple to get, and they're not too big so most people don't have a problem repaying them. So this point sounds about right.

8) Increase the opportunities for microloans to new businesses, and increase the public's awareness of them. Microloans are generally quite clever and useful, but this point needs more details. I'm guessing this would be a job for KredEx, but I suspect a lot of people don't even know KredEx exists.

9) Use EU funds earmarked for retraining to streamline the professional training system; involve the employers; decreace the bureaucracy in state tenders; let the Ministry of Education run training programs, and bring more universities on board. Again, good but vague.

10)Create a program to fight unemployment among the youth. Got a detailed mission statement for the program somewhere? Hell, the last effective program of this kind was the real estate boom; all the unskilled school-leavers went into construction.

Laar's speech leaves an overall impression that he needed to have 10 points for the entire thing to look good. Needz moar specifics. Otherwise though: good ideas. Now go and make it happen.

4 comments:

Oh, I'm afraid these points mostly just awaken the Nordic Social Democrat in me... I guess more deregulation and less governmental control is the solution in this crisis largely created by reckless deregulation and lessening of controls and oversight.

I suppose Moses was the original spokesman for the original 10 point plan. It seems the goals were all good, and had widespread support, (except for that adultery thing), however the details are still being worked out over time in special circumstances.

I wish Mart Laar good luck on those coordination thingies, but generally there is nothing to hate here.

Bank regulation has been relatively conservative and prudential with a 15% reserve requirement and a 100% risk rating for real estate. This has quelled the boom a bit in mortgages, compared to many other markets. In stead Eestipank focused on supervision and solvency of banks and other financial institutions, which is the major concern for the central bank in a currency board system. Monetary policy is closest to Hong Kong or Singapore in character, rather than hungary. The chief difference is Estonia has always been tied to Germany monetary policy since 92, instead of the dollar. This means that prices in Estonia (before tax) have been converging with prices in Germany over the last 18 years. Edward Hugh and the other nay-sayers say Prices have overshot and the pain and unemployment is inevitable. This is debatable.

While estonian personal debt is 37% of gdp, in the US mortgage debt is over $10 trillion, twice in proportion. In Estonia household consumption was rarely over 45% of GDP, while in the US it hit 70%. While Americans remodeled and bought new houses, Estonians remodeled, bought machines and built commercial buildings. I guess the real crisis is in commercial real estate like retailers, malls etc. Reducing the reserve requirements to 12% would still leave it higher than it was in 2004. It would give the banks some room to keep some credit flowing.

Since the world -wide financial turmoil has hit Estonians hard, the political imperative to do something is a major political imperative. They should remember Estonians goals and aspirations for a more educated, prosperous society with institutions that are responsive to their customers, increasing convenience , work that is more interesting and specialized.

Ending the tax on investments in education fits all those goals. I wouldn't expect huge results from it though. More can be done to increase the value of the Estonian labor force and the specialization of Estonian firms, but frankly you guys have been doing very well compared to Latin America say.

One temptation is to try to buy industry from other regions through special aid packages. This is a slippery slope that opens the door to all sorts of mischief and corruption. Such smokestack chasing, as we used to call it, is an invitation to bribery, attracting large, but marginally profitable, branch plants that do little in the long run except politicize the whole investment process. Much better to be the fundamentals right-- good transportation networks, good legal systems, good education systems, low and predictable taxes, open product, service and labor markets.In Chile, the approach was "no special deals" which they followed for years they still developed nicely. In Cuba (during the Batista era) the approach was the government would match foreign investors with cash. This ended badly.